Using ‘Currency’ to Your Advantage

What do you think of when you hear the word ‘currency’?

Cash? Bitcoin? Dineros? Dollars? Sawbucks? Moolah? Dead Presidents? Pesos? C Notes? Shekels? Or my personal favorite, wampum? 

Currency is nothing more than a form of value that can be exchanged between parties. And while we generally associate currency with cash, currency can take on many forms. Time, risk, certainty, labor or other more conceptual versions of value can also be used as currency by a shrewd buyer or seller.

So when I hear people talk about negotiating for a home, piece of land or other property, I almost exclusively hear them talking about price. It is unfortunate, as often times, each side misses the opportunity to strengthen the deal for themselves by introducing other forms of ‘currency’ into the negotiations.

So what do I mean by ‘other forms of currency’ in a real estate transaction?  Lets discuss.

Time

The first and most obvious most universally accepted form of currency is time. Our beloved bespectacled founding fatherly figure Ben Franklin once said (or so my 3rd grade teacher said he did) that ‘Time is money.’ Time IS money — provided it is leveraged correctly.

It amazes me when I see or hear one side of a transaction digging in on a time issue when they don’t have to. Typically, when a seller is trying to simultaneously sell their home and move to a new one, they have a time issue. And when an apartment dweller or someone else with time flexibility is trying to purchase and is inflexible on the possession date, they are costing themselves money and/or possibly even the chance to secure the home for themselves.

Offering a time-constrained seller the luxury an early settlement with some form of possession post-closing can mean the difference between winning a competitive bid and losing it. Similarly, accelerating inspection schedules (other contingency deadlines) to create a fully ratified contract or offering a floating closing date — this things help aid the seller in finding the home of their wishes — and everyone wins. 

A buyer can can either help or hinder the seller’s next purchase and the lesson is that while cash means the same to each of us, often times 30 days may mean a great deal more to one side than the other. Figure out what currency you can offer cheaply that the other side values dearly, and you will come out ahead.

Risk

Hand in hand with time, as a form of currency, is risk.

Real estate is typically a two-sided transaction. While it is easy to focus on only one side of the transaction, they are almost always related as selling one means buying another or moving out of one home means moving into another.

So anytime there is a two-sided transaction (which is most transactions), each side carries varying degrees of potentially negative outcome if the transaction fails to consummate. A buyer spends money on inspections, loan fees, title searches, deposits and other items that are paid for well before the transaction closes. No closing = sunk costs. Similarly, a seller also experiences many of the same costs, especially if they are also buying and again (if the transaction does not close) they are left with not only the loss of any fees, but potentially subject to legal action for failure to perform under the terms of their contract to purchase the next home.

Needless to say, both sides carry risk, but often in different forms and quantity. So when one party who can potentially absorb risk (think of a tenant who can stay month to month) refuses to mitigate the risk for other side of the transaction, I see an opportunity lost to really strengthen a deal.

Comparing Offers

Imagine yourself as a owner who has a home under contract with a builder that will be ready in ‘about 90 days.’ Your current home is older, but in good (although not great) shape and probably needs some work. You put the sign in the yard and within a week, you have three offers, all from buyers who are currently renting an apartment:

• Offer One — Full price with the seller putting 5% down, pre-approved by a local lender, who wants you to respond by tomorrow at 5 p.m. and wants to close in 60 days.
• Offer Two — Full price with the seller putting 20% down. They have been pre-qualified by Quicken Loans, and want to close in 90 days, but needs 3 weeks for inspections due to travel. They have given you two days to respond.
• Offer Three —  Is for $10,000 less than full price, but will close in 30 days and offer you a rent back for up to 120 days if you need to. They are pre-approved by a local lender and putting 10% down. They have given you two days to respond. Additionally, they will inspect the home within 7 days AND absorb the first $5,000 any inspection items found.

Which one would you choose? I know which one I would recommend to my seller to accept. While offering a marginally lower price, the third offer contains the most time-friendly and flexible terms to the seller (that they TOTALLY  needed) while still mitigating risk for both sides. Whatever agent recommended that final contract structure is a true pro and odds are wins a lot of bids for their clients (ok, that was how we structured a winning offer for our client in a competitive bid situation earlier this year, sorry to brag …)

‘Win-Win’ is Not Just a Cliche

In a prior post, we talk about how a typical real estate contract is made up of 20 pages with only one paragraph dedicated to price. The remainder of the contract discusses terms ranging from timing to contingencies to inspections to personal property to title — each one of these clauses can and should be used to strike a deal that benefits both parties. ‘Win-Win’ may sound cliche, but really provides the most durable framework for contracts.

Think each deal through, strive to understand what currency each side can offer the other one — and don’t solely focus on price. While price is obvious important, don’t ignore the other terms. Your deal will be stronger, your risk lower and the likelihood of your transaction closing on time and as written and will skyrocket.